Support and resistance levels in trading

Forex trading Kenya

Almost every trading system in the world relies on support and resistance levels, it is the core foundation of the market structure. But it is how you draw them that will ultimately decide whether or not you will probably understand the underlying market movements. Without the proper ability to draw support and resistance levels, you will not be able to identify the correct market structure in your trading.

Mapping support and resistance levels

Mapping the support and resistance is the most important skill for any aspiring trader. If you have trouble plotting them the correct way your trading will never be successful.

mapping support and resistance levels
Mapping support and resistance levels

To become great at plotting support and resistance you have to understand what it is and how it works.

Support and resistance are a great way to make you understand how the market has been moving and where there is a potential support or resistance level. This means there are significant levels that you will see once you start practicing this. These significant levels are so vital to your success because it is when the price reaches these levels that it truly moves in the desired direction. This is where you can catch a trend, and every trader loves to catch trends because trends have the best risk to reward ratio in trading.

To make it in this industry you have to preserve your capital and the only way to do it is to trade using proven methods that have worked for years, and support and resistance are the core foundation of that. It is not hard to plot support and resistance levels, what is hard is the proper knowledge and the practice that you need. And because the market is always  subjective, you have never been taught in life to make subjective decisions, even in  school we were always taught to study simple rules that will work in any scenario, trading is not like that, trading is the same as being an entrepreneur who has to figure out his/her own rules. Support and resistance levels are something you have to develop over time, meaning you must have enough chart time to be able to know what levels are working and which ones are not working.

Trading time frames

Time frames work differently and they will all tell you different stories. And no trader wants to work with mixed information. To eliminate this always start your analysis from the biggest time frame, most likely the monthly time frame, the monthly time frame will give you the best levels but they will always be far apart and markets will move differently in lower time frames to get to that destination creating smaller structure movements. The weekly time frame will give us more clear direction on what the monthly time frame has told us, and then now the daily time frame will tell us more about the direction the weekly chart has told us.

Then now we have the execution or the lower time frames the 4hr – 15mins, this were you hunt for the same movements we want to see develop in the higher time frames but we want to catch then early and monitor the behavior because we want to see exactly in detail if the market is trending in that direction or not and how the structure is looking, 4hr time frame is great for this. 4hr is also great for scalping traders who want to scalp the minor time zones or the small movements in the market, also known as short term trades, the midterm buyers is usually he extended take profit going to the daily and weekly targets and long term buyers are based on monthly targets, which are the most extended targets. This is where you really need to practice, but if you combine all of this you will become a great scalp trader and you will get the best from all worlds because you will be able to understand minor structures and movements and you will be able to learn to understand the long-term movements of the markets, meaning you’ll be able to combine the two to get better insights on how the market is moving. It is also important to learn to control your emotions to be able to hold for an extended period of time without making premature decision-based on the emotional factor that you have not yet learnt to control properly.

Identifying support and resistance levels

When you look at the price on a price chart, you realize that there are certain levels or zones where price reverses any time it reaches that zone. These are known as support and resistance levels and there are undoubtedly two of the most highly discussed attributes of technical analysis in forex trading

Resistance level

From the price chart above you realize that price level hit some sort of ceiling (resistance) twice and then it reverses back. Now, this has to tell you something! There is something at this level. What actually happens at this level is an excess supply. This means that many traders have set their take profit at this zone and others are holding and waiting to sell when the price reaches that level when now they start selling at these levels they cause supply to exceed the demand and as obvious the price starts dropping.

Note: To qualify as a significant resistance level, the price level (ceiling) must be hit/tested at least three times. The resistance level doesn’t usually form a straight line, it is not a fixed point, it’s a region.

When the price hits the resistance level and fails to break it, it usually creates a bearish momentum.

Support level

Support level

In support levels price attempts to go below certain zones but it bounces off. The reason for this is that demand is exceeding supply at this level, there are many buyers waiting to buy at this price zone, they consequently cause an increase in demand and price level goes up again.

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